5 problems of the economy: IMF

The global economy has come a long way since the height of the financial crisis in late 2008. However, key issues still remain. In its January 2011 Global Market Stability Report, the IMF highlighted five such problems that still plagued the world'

Beaten down banks, especially those in the U.S., are certainly much improved from their near-death states at the height of the financial crisis.
Nevertheless, problems remain.
For U.S. banks, the credit quality of commercial and residential real estate loans on their balance sheets pose risks. Moreover, the shadow housing inventories and the unresolved status of Fannie Mae and Freddie Mac hang over the financial system.
For European banks, their loans to peripheral euro zone governments are the main risk. Moreover, the size of the European Financial Stability Facility is too small, according to the IMF. Lastly, European banks need to undergo rigorous stress testing and weak banks need to be recapitalized accordingly. Photo: REUTERS

ose monetary policy from developed countries and better economic fundamentals in emerging market countries have caused massive inflows of capital into emerging market countries.
While foreign capital inflow can be good, it can also be destructive if not handled properly.
One, they can cause asset bubbles that distort the economy and wreak havoc once they collapse.
Two, it can lead to indebtedness and the proliferation of low-quality loans, which were the two major causes of the financial crisis in developed countries.
Three, foreign capital inflows can be fickle and leave a country rather quickly. Such reversal can severely disrupt emerging market economies.
Unexpected interest rate hikes in developed countries, lowered growth expectations in emerging market economies, and renewed risk aversion can all trigger disruptive outflows.
The IMF identified the equity markets of Colombia and Mexico as hotspots for capital inflows. The phenomenon is also seen in the markets of Hong Kong, India, and Peru. Photo: Reuters

Some developed countries have staggering levels of debt. This burden, combined with subpar economic growth and (in some cases) declining population, raises serious concerns about the sustainability of their public debt.
Moreover, some of these countries don't have a credible medium-term plan to reduce spending and face daunting funding needs in the coming years.
In addition, many of these countries have short-term debt, so they are subject to rollover risk.
As the market's faith in their credit erodes, their borrowing costs climb higher and the maturity of their loans shorten. This vicious cycle then causes them to have even funding needs.
The market is already concerned; currently, the CDS of certain developed countries exceed those of certain large emerging market countries, according to the IMF. Photo: REUTERS